CapitaLand Ltd - Chinese residential sales stay muted

CapitaLand Ltd: Drag from slowing Chinese sales
● Boost mostly from one-time gains
● Chinese residential sales stay muted
● Lowering fair value to S$3.21

Boost from one-time gains
CapitaLand Ltd’s 1Q12 PATMI came in at S$133.2m, up 31% YoY mostly due to divestment gains from the Hilton Double Tree Hotel in Kunshan and revaluation gains for three Japanese malls. Adjusting for oneitems, we estimate 1Q12 PATMI at S$78.4m which is broadly in line with our expectations. 1Q12 topline came in at S$641.1m - up 4.8% YoY mainly from higher revenues from development projects in Singapore and Australia, partially offset by lower residential sales in China.

Drag from Chinese sales continue
An anemic 189 residential units were sold in China over 1Q12 - much in line with the pace seen in 4Q11 (161 units). Only 65% of
launched units are sold to date, underscoring the challenges from continued residential curbs in China. We believe the group would adopt a wait-and-see stance with regards to launches ahead. In Singapore, we saw 57 homes sold in 1Q12 and expect a bump next quarter from Sky Habitat sales (launched Apr 2012, 125 units sold on opening weekend).

Ramp-up CMA somewhat lower than expected in 1Q12
Retail mall subsidiary CMA reported 1Q12 PATMI of S$66.8m, up 36.1% YoY mainly due to revaluation gains (S$30.7m). This was somewhat below expectations due to higher operating expenses and a slower-thanexpected ramp-up at new malls. We continue to see good QoQ growth in NPI yields on cost, however, across the Chinese portfolio. CMA would also acquire a 122k sqm shopping mall in Tiangongyuan south of Beijing, to be completed in 2015, which would cost RMB 2.3b (~RMB19k psm GFA). We judge the price paid to be reasonable but see little RNAV accretion at this juncture.

Maintain BUY at lower S$3.21 fair value estimate
Given latest data-points, we now expect Chinese residential curbs to stay in place for most of FY12 and that additional property curbs in Singapore are likely. We pare our fair value estimate to S$3.21 (S$3.40 previously) mostly due to updated valuations for listed entities, and lower ASPs for residential developments.

Target Price S$3.40

• Results below expectations. CapitaLand reported 1Q12 PATMI of S$133.2m (+31.3% yoy). Core PATMI (excluding revaluation and fair value gains) of S$107.2m (+7% yoy) came in lower than our expectations (15% of ours’/16% of street’s) mainly due to lower-thananticipated contributions from The Interlace, Urban Suites and its China projects.

• The group booked portfolio gains of S$28.8m mainly from the divestment of Hilton Double Tree Hotel in Kunshan and a net fair value gain of S$38.3m from investment properties in China and Japan.

• Overseas EBIT accounted for 61% of the group's total EBIT, higher than 54% last year, mostly on higher contributions from Australia and Other Asia. Geographically, its three key focus markets - Singapore, China and Australia accounted for 79% of total EBIT.

• CapitaLand’s NTA per share rose 8% yoy to S$3.41/share.

• Gearing ratio increased marginally from 0.31x to 0.36x. The cash balance remains healthy at S$6b.

Stock Impact
• Slower residential sales due to lack of new launches. During 1Q12 CapitaLand sold a total of 57 units in Singapore (vs 167 in 1Q11 and 844 in 2011) with a sales value of S$88m. The slower sales volumes were due to the lack new project launches in the quarter. CapitaLand launched its much awaited Sky Habitat in Bishan (Apr 12) and sold 129 units (25% of total) to date in the S$1,642-1,747psf price range, which is a new benchmark for the area. Management has guided a cautious outlook ahead, citing global uncertainty and possible further cooling measures. In China, CapitaLand sold a total of 189 units in 1Q12 (vs 437units in 1Q11) due to the cautious market sentiments on the back of cooling measures. Looking ahead, CapitaLand is expected to launch new phases at The Interlace, D’Leedon and Urban Resorts projects in Singapore and new units in Royal Residences in Beijing.

• Strong operational performance from its listed entities. CapitaLand’s key listed entity CapitaMalls Asia (CMA), which accounts for roughly onethird of its earnings, is seeing an operational turnaround with occupancy of more than 95% in its completed malls with higher gross rental yields. CapitaMall Trust, which operates more than 15 shopping malls in Singapore, witnessed a strong first quarter with portfolio occupancies of 96.4% (+1.6ppt) and 6.1% increase in recent rental renewals. CapitaCommercial Trust saw a +3.4% yoy increase in DPU for 1Q12 with good uptake of 94,300sf of new office space. Serviced residences operation under Ascott saw a healthy 26% yoy jump in Revenue Per Available Unit to S$92. The strong operational performance of its listed entities bodes well for CapitaLand.

• Healthy balance sheet, debt headroom of about S$2.5b. CapitaLand’s net gearing currently stands at 0.36x with a cash position of S$6.3b. Assuming a comfortable gearing of 0.5x, CapitaLand has additional debt headroom of more than S$2.5b to capitalise on acquisition opportunities. Management noted that it will stay nimble in its acquisition plans after committing about S$11b in investments last year and prefers to acquire mixed development sites in Singapore and China. We also see some potential asset recycling opportunities ahead for CapitaLand with possible divestments including Ion Orchard and its assets under Raffles City China Fund.

• Mr Ng Kee Choe succeeds Dr Hu as chairman of Capitaland’s Board. Dr Hu Tsu Tau, following his retirement as the Chairman and Director of the board (announced in Feb 12) will be appointed as Senior Advisor to the board. Mr Ng Kee Choe, an Independent Non-Executive Director who joined CapitaLand’s Board in Apr 10, will succeed Dr Hu as the Chairman of the Board and Chairman of CapitaLand’s Investment Committee wef 1 May 12. Mr Ng is presently Chairman of Singapore Power Ltd, SP AusNet and NTUC Income Insurance Co-Operative Ltd and President- Commissioner of PT Bank Danamon Indonesia. Mr Ng is a member of Temasek Advisory Panel and International Advisory Council of China Development Bank. In addition, he is also a Director of Singapore Exchange Limited and Singapore Airport Terminal Services Limited. Mr Ng was the Vice-Chairman of DBS Group Holdings and he retired from his executive position in Jul 03 after 33 years of service with DBS.

Earnings Revision/Risk
• We revise our 2012-14F earnings estimates by -8% - +4% mainly adjusting our earnings recognition from the Interlace and D’Leedon projects.

Valuation/Recommendation
• Maintain BUY and target price of S$3.40, pegged at a 20% discount to its RNAV of S$4.28/share. The stock is currently trading at 0.84x P/B and 0.69x to its RNAV. We see good value in the stock with the peak of China’s policy measures behind us and better operational performances from its listed entities.